Seattle tech entrepreneurs and investors were mixed in their response to a new ruling that found a statewide tax on capital gains to be lawful. (GeekWire File Photo / Kurt Schlosser)

Seattle tech leaders shared both praise and concern over a highly anticipated ruling from the Washington state Supreme Court on Friday allowing a new capital gains tax to move forward.

The tax sparked controversy within the tech industry because it targets stocks, a key part of compensation for many startup founders and their employees.

The law imposes a 7% tax on capital gains of more than $250,000 from the sale of stocks and bonds, excluding revenue from real estate and retirement accounts, among other exceptions. 

The tax was approved by legislators two years ago, but faced legal opposition. It went into effect in January 2022.

The tax will affect founders and employees that have sold their companies since then or do so in the future, though there may be some potential exemptions. The first payments to the state are due in April.

For example, if a startup founder receives $10 million in personal proceeds as a result of an acquisition, they would be on the hook to pay $682,500 to the state for the new capital gains tax, as shown in this guide from the Department of Revenue.

RealWear, a Vancouver, Wash.-based industrial headset maker, announced last month that it is going public. The company’s CEO, Andrew Chrostowski, confirmed to GeekWire that shareholders based in Washington state will be impacted by the new tax if they sell stock.

“We are disappointed by this ruling,” Chrostowski said. “It makes Washington a less desirable place for business, especially if you’re an entrepreneur.”

Ted Hawksford is CEO of Seattle startup LiquidPlanner, which was acquired this month by Boston software company Tempo. He couldn’t comment on the details of the transaction and how the new tax will affect LiquidPlanner’s shareholders.

But Hawksford called the ruling “disappointing.”

“The new tax will influence decisions going forward relative to where we choose to invest in building out the team as part of Tempo,” he said. 

Hawksford said LiquidPlanner recently shifted to a fully remote company and 40% of its workforce moved out of Washington “to more agreeable destinations such as Texas, Florida, and North Carolina.”

“As part of Tempo, we will maintain this flexible approach for our talent and may at some point opt to establish our business license in more business-friendly locale than Seattle,” he said.

Others applauded the court’s ruling.

Xiao Wang, CEO and co-founder of Seattle immigration startup Boundless, said the state “can’t have it both ways.”

“We can’t achieve the community, environment, housing, social support, schools, arts, and more to increasingly make this region a great place to live for founders and employees, and solely rely on a regressive tax structure to fund these services,” he said.

He added: “If [the tax] results in more founders establishing residency in Florida prior to IPOs, hope y’all enjoy hurricanes and mosquitoes.”

The estimated $500 million in yearly revenue the tax is expected to generate is earmarked to be funneled into early-childhood education programs and school construction.

“If [the tax] results in more founders establishing residency in Florida prior to IPOs, hope y’all enjoy hurricanes and mosquitoes.”

Advocates said it’s one way that Washington’s regressive tax laws can be altered to help low-wage earners and level the playing field for people of color and rural communities who are overrepresented in low income brackets.

The state has no personal or corporate income tax and generates most of its revenue through sales, property, and business and occupation (B&O) taxes.

Chris DeVore, founding managing partner at Seattle venture capital firm Founders’ Co-op, said “it’s frankly embarrassing that a state as prosperous as Washington has one of the most regressive tax regimes in the country.”

“Our lack of income tax has definitely been a draw for high earners from other states and the imposition of a capital gains tax will slow that inflow somewhat,” he said.

“But in my experience great founders are rarely tax optimizers but rather focus on creating massive new value, so the net impact on our startup economy won’t amount to much, and the benefits to our civil society will far outweigh the cost.”

Katelyn Donnelly, a venture capitalist at Avalanche VC based in Seattle, said she was part of a startup acquisition last year and will be subject to the tax. She said she’s highly supportive of funding education in Washington state, but said the tax could hurt the creation of new companies.

Longtime Seattle entrepreneur Marc Barros said the tax will make founders reconsider whether they should launch a company in Washington state.

“Founders take years or decades to see a return,” said Barros, CEO of camera startup Moment. “Reducing that potential return makes us less competitive than other states.”

Steve Singh is a managing director at Madrona Venture Group who previously co-founded and led expense software giant Concur, which was acquired by SAP for more than $8 billion in 2014.

Singh said he does not believe the capital gains tax helps the state’s “competitive position.”

“Additionally, I think individuals and companies make the best investment decisions to support their communities versus governmental bodies that are not accountable to results,” he said.

An estimated 7,000 households — the wealthiest in the state — are estimated to be affected by the capital gains tax law, according to Invest in Washington Now. Roughly two-thirds of those households are in King County.

The tax could also impact employees at larger Seattle-area companies such as Amazon or Microsoft who sell stock.

Sharon Chen, a former Microsoft manager currently on the board of Progress Alliance, said she would be subject to the tax — and supports paying it.

“Wealthy people move to, and stay in, places that have great schools and universities, clean air and water, healthy food, and a vibrant culture,” she said in a statement. “Those who’ve done extremely well in Washington have a responsibility to act together to invest in our state and our communities.”

The legislation faced legal challenges on whether it should be considered an income tax or sales tax.

In its opinion issued Friday, the court concluded that the capital gains tax “is a valid excise tax under Washington law.” Justices voted 7-2.

“The capital gains tax targets startups at an outsized rate.”

The ruling could pave the way for a broader reform that would bring an income tax to the state, said Joseph Wallin, a principal at the law firm Carney Badley Spellman.

Wallin, a longtime legal advisor for startups, said the state’s lack of income tax was a key reason for why startups would move from California to Washington. He predicts the ruling will “drive people from the state.”

Kelly Fukai, vice president of community and government affairs with the Washington Technology Industry Association, said the ruling could jeopardize a “meaningful mechanism” in attracting and retaining entrepreneurs.

“The capital gains tax targets startups at an outsized rate,” she said.

Washington fell 13 places to No. 28 in a recent ranking from the think tank Tax Foundation on state business tax climates, “primarily due to giving up its status as a state without an income tax,” after the capital gains tax approval.

“This ruling undermines Washington state’s competitive status making it harder for our state to attract, retain, and grow jobs and economic opportunity,” Washington Policy Center CEO Mike Gallagher said in a statement.

The video below, published by Invest in Washington Now, a nonprofit that supported the tax, shows how much a person would owe based on the new tax.

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